Danish Credit Crunch Deepens

My friend SS sent me the following Bloomberg report.

Feb. 6 (Bloomberg) -- Denmark’s credit crunch is getting worse as businesses accuse banks of withholding funds and the financial regulator warns that deteriorating asset quality may put more lenders out of business. 

“When we ask our companies, small- and medium-sized, they say they are experiencing a credit crunch and it has become worse in the last month,” Karsten Dybvad, chief executive officer of the Danish Confederation of Industry, said in an interview in Copenhagen.  

Dybvad’s group, which represents 10,000 Danish firms, wants the financial regulator to give banks more leeway in meeting capital requirements so they don’t call in loans and fuel a vicious circle that’s stifling the $300 billion economy. In a December survey of confederation members, two thirds said they had limited access to financing, while one in five said an absence of funds was the biggest obstacle for growth. 

Three Danish banks, including Amagerbanken A/S, failed last year after the FSA required them to restate bad loans, leaving them in breach of capital rules. Two of the failures pushed losses on to senior creditors and exacerbated a funding squeeze that’s frozen most of Denmark’s 120 banks out of debt markets. 

[...] The Organization for Economic Cooperation and Development warns an absence of credit may fuel a vicious circle in which businesses lack the funds to run their operations, leaving them unable to pay their debts.
[...] 

Denmark is also struggling to recover from a property bubble that burst in 2007, throwing the economy into a recession and killing jobs. House prices fell an annual 8.5 percent in November as the gap between bid and ask prices widened. Prices will have slumped 25 percent by 2013 since the crisis started in 2007, the government-backed Economic Council estimates.

[...] Denmark has the highest household debt load in the world, at 310 percent of disposable incomes, Exane BNP Paribas estimates.

Amazingly, credit addiction is deeply entrenched in Denmark as well, as this unbelievable statement from Dybvad group, which is asking the regulator to allow bankrupt banks to stay in business so that they can push on more loans... By the way, it looks like Mark-to-Fantasy has some limits in Denmark, while it's unlimited in the US, where the corruption of the system is far deeper than anywhere else in the developed world.

If you need to borrow money every month to keep your business running... Guess what? You're business should be closed long time ago and you're insolvent!

The OECD is saying that — I take a shortcut — if you don't lend the businesses money, they will go bankrupt... Eeeerrrm... How to put in a easy to understand statement? Well business, like states and countries, which rely on borrowing and spending and fail if no more credit is allowed are already insolvent. In addition to what, these kind of businesses have a name: Ponzi Schemes. One must be really from a communist country like France to believe otherwise.

What an amazing closing sentence... Now flashback in march 2011:

Denmark’s mortgage bond market is about 1 1/2 times the size of the country’s economy and more than seven times the size of the government bond market, according to the central bank.

And, flashback in 2009: I wrote a post titled Denmark the next country to default? where I basically made the same kind of forecasts.

Finally, flashback just a month ago, in January 2012:

 Jan. 19 (Bloomberg) -- Billionaire George Soros’s assertion that Denmark’s $480 billion mortgage credit system can weather any crisis better than any country where mortgages are bought and sold is proving the rule for international investors.

George Soros might be right, but weathering better doesn't mean that you're not going to make losses. I actually think losses will be substantial when banks default and debt is marked down.

The Nykredit Mortgage Bond Index, which includes the largest, most-traded of the securities, rose to a record this month, holding up through a real estate slump, a banking meltdown and Europe’s debt crisis. Home-loan bonds have gained 29.2 percent since 2007, beating U.S. Treasuries. 

[...] Denmark’s benchmark mortgage bonds have gained almost as much since the U.S. subprime collapse triggered the global credit seizure in 2007 than in the prior five years. Demand is surging even as home prices are projected to fall 25 percent by 2013 since the crisis, economic growth slows and unemployment rises, with investors gravitating to a country that’s one of only 12 nations in the world with AAA ratings at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. 

The Danish mortgage bond market differs from other countries in several key respects. When a homeowner in Denmark takes out a loan, the mortgage is immediately converted into a security of the same amount. A homeowner can then retire a mortgage either by paying off the loan or by purchasing an equivalent face value of the bonds at the market price.

Danes call this the balance principle. Mortgage issuers take all the credit risk, providing reserves in case a borrower defaults. Investors face a risk only on interest-rate fluctuations. Another difference with the U.S. is there are no government-sponsored companies involved in the market.

Can mortgage issuers take all the credit risk? How stupid is that statement, specially in 2012, when we saw what happened to similar schemes in the US? Fannie and Freddie anyone? If the mortgage guarantor defaults, what are your chances of getting back your principle?